While the 401(k) market has been tough to crack, firms are making headway with wealthy individual investors through channels such as private banks and broker-dealers. Blackstone raised $10 billion from individual investors in 2016 and $50 billion from such clients in the past five years. About a quarter of Washington-based Carlyle’s fundraising and about 20 percent of KKR’s come from individual investors, which account for about 10 percent of Apollo Global Management LLC’s assets under management.
“We don’t need the 401(k) market to open up for us to be successful,” said Joan Solotar, head of multi-asset investing and external relations at New York-based Blackstone. “There’s so much else we can do in the meantime, and by the time that market opens, we’ll be there.”
Aside from structural roadblocks such as liquidity that make 401(k)s a challenge, there are real costs to implementation. A flood of new money cracked open by retirement savings would pressure private equity firms to invest bigger volumes of capital, potentially damping returns, Blackstone President Tony James said at an event last month discussing the U.S. retirement system. Still, James has been vocal about the benefits private equity could offer ordinary savers.
The distribution system needed to reach these clients could also be prohibitively expensive, said Jim Burns, the head of KKR’s individual investor business.
“As you try to reach broader and broader audiences, you have to keep a close eye on profitability,” Burns said. “How do you reach those people, how do you structure, distribute and support products? There’s a material cost to that.”
Small Investor
Some efforts have failed. In 2015, Carlyle shut a pair of mutual funds targeting individual investors because of lack of demand and high costs. That followed KKR’s move to close down two debt funds the previous year for similar reasons.
If private equity does find its way onto 401(k) menus, questions persist about risk and suitability. The shadow of the financial crisis looms large whenever a complex investment reaches the masses. Accountability and quality are reasons people should be safeguarded when investing in private equity, said Luis Viceira, a Harvard Business School professor who teaches investment management.
“The 401(k) plan holder at the end of the day is a small investor,” Viceira said. “It may make sense for them to have this exposure, but it has to be structured in a way that they are protected.”
This article was provided by Bloomberg News.